Don’t Let News of Rising Home Prices Scare You Away

At the end of April, financial news headlines were abuzz with reports of an impressive rally in home prices. By some measures, the housing market was posting its best performance since the peak of the housing boom – and memories of what followed that boom may have more cautious consumers backing away from buying a house right now.

So which is the right approach? Should you be afraid, very afraid, of another bubble in home prices, or stop worrying and learn to love the boom?

A closer look at the numbers shows that in many cases, the rally in real estate may be a little over-hyped, which is good news for price-conscious potential buyers. In fact, with 15- and 30-year fixed mortgage rates continuing to fall, the cost of buying a home has not risen as much as the rally in real estate prices might suggest, especially in some areas of the country.

Memories of 2006

The recent excitement over the rally in home prices was sparked by an April 30 report on the S&P/Case-Shiller Home Price Indices. The S&P/Case-Shiller composite of prices in 20 major metropolitan areas showed a solid year-over-year increase of 9.3 percent. What really caught people’s eyes, though, were some comparisons with the housing boom of the mid-2000s.

The S&P/Case-Shiller report pointed out that the 9.3 percent gain was the biggest year-over-year increase since early 2006, and that all 20 markets in its composite had posted consecutive monthly gains for the first time since 2005.

Given that the housing market peaked in early 2006, those comparisons evoke memories of the epic boom in housing prices that led up to that point. A closer look, however, shows that today’s real estate market is not all that comparable with the 2006 boom.

Not So Fast

Even though housing prices have recovered somewhat over the past year, they are still nearly 30 percent below their 2006 peak levels, according to the S&P/Case-Shiller report. Also, while the recent 12-month gain was the best since early 2006, housing prices are not rising nearly as fast as they did in the years leading up to that point.

The recent 9.3 percent year-over-year gain pales in comparison with the nearly four years of double-digit annual gains the housing market enjoyed up until the spring of 2006, and with the peak year-over-year gain of 17.12 percent that home prices reached in August of 2004.

Location, Location, Location

Of course, national trends are of limited use in understanding a market that is as location-specific as real estate. How home prices were affected by the boom, the crash, and the recent recovery varies depending on where you look.

For example, over the past year, while home prices have risen by an average of 9.3 percent nationally, the increase in major metropolitan areas ranges from a low of 1.9 percent in New York City to a high of 23.0 percent in Phoenix.

Comparing home prices now with their peak levels shows that while the Las Vegas market is still 55.0 percent below its all-time high, Dallas is just 4.5 percent below its peak. Looking longer term, Washington DC has gained the most since January of 2000, while home prices in Atlanta, Detroit, and Cleveland are cheaper today than they were back then.

In short, as you look from one location to the next, there are still bargains to be found as well as potential price bubbles to be avoided.

15- and 30-year Fixed Mortgage Rates Continue to Fall

The recent rise in housing prices is partially offset by the fact that 15- and 30-year fixed mortgage rates continue to decrease. According to Freddie Mac, 15-year and 30-year fixed mortgage rates are both lower than they were one, three, five, and ten years ago.

The continued fall of mortgage rates means consumers aren’t actually paying as much for housing as price changes alone would indicate. Depending on how you look at it, this either takes some of the luster off of the apparent rally in home prices, or it takes some of the sting out of those rising prices if you were planning to buy.

The bottom line for home buyers is that you can still get good value for your dollar if you shop around for both the best housing prices and the best mortgage rates on the market.